How Does the SSA Calculate Cost of Living Increases?

Next year, Social Security recipients will see a 2 percent raise in benefits, the largest increase in six years.

For Social Security Disability Insurance (SSDI) recipients, the average monthly benefit will go up from $1,170 to $1,180, not including people who are blind, for whom the monthly rate is significantly higher. For Supplemental Security Income (SSI) beneficiaries, the average monthly benefit will rise from $735 to $750.

But how does the Social Security Administration (SSA) calculate its annual cost of living adjustment (COLA)?

The answer is a seemingly arbitrary measure of inflation, long criticized by advocates for the elderly and people with disabilities as unrepresentative of the spending patterns of Social Security beneficiaries.

Each month, the Bureau of Labor Statistics (BLS) publishes a variety of different measures of inflation, each of which are tailored to reflect the impact of price changes on different population groups.

The SSA, when calculating its annual COLA, relies on a measure of inflation known as Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Adopted by the SSA in 1975, this Index attempts to measure inflation based on the spending patterns of people living in 1) urban households, 2) for whom at least half of the household’s income comes from clerical or wage occupations, and 3) one of the household earners must have been employed for at least 37 weeks during the previous 12 months.

According to the BLS, only about 28 percent of the total U.S. population falls into households that meet this criteria. As very few of these households contain individuals receiving Social Security benefits, it is unclear why the CPI-W is the SSA’s preferred measure of inflation. Many advocates contend that the CPI-W doesn’t rise quickly enough to reflect the spending patterns of SSI and SSDI beneficiaries.

Ironically, the BLS has constructed – but does not yet use for the COLA – a separate index for measuring inflation for the elderly that tends to record higher rates of inflation, primarily due to increased medical costs. As such, this index also would likely better reflect the economic realities for SSI and SSDI beneficiaries. The BLS, however, warns that this separate index for the elderly is currently experimental, and should be treated with caution.

Despite widespread criticism of the SSA’s reliance on the CPI-W, most legislation in recent years has been focused on pushing the SSA to adopt an even stricter form of inflation measurement.

The Obama Administration, in both 2013 and 2014, and numerous Republican budget proposals, including the most recent one in the House, have pushed for a new measure known as the “chained CPI.” This measure attempts to calculate how people compensate for increased costs via substitution, i.e., buying one product instead of another. Annual inflation is typically measured as between 0.25 to 0.35 percent less under this measure, according to the New Republic.

The Social Security COLA went up just 0.3 percent for 2017 and not at all for 2016. Next year’s increase is primarily the result of recent boosts in energy and food prices.